Simple Budgeting

A First Step in Getting Ahead

Pat Brennan  |   January 18,  2021

Getting a grip on how much money you have coming in and going out is absolutely necessary to building a workable budget.  There are spreadsheet tools, software tools, all kinds of ways to do this.  My advice is to keep it simple.  First, figure out from pay statements how much you have coming in.  That should be relatively easy unless it varies a great deal from month to month which may require an average.

Next, I recommend tracking your expenses for a few months to not only get an idea of how much you spend, but also what you are spending your money on.  This may provide some interesting insights on to where your money goes.  Is eating out costing more than you thought?  Are there other discretionary expenses that are high?  Many of your other expenses you can see online, or if you aggregate spending on a credit card you can quickly get a grip by looking over your statements. 

A brief side note on debit and credit cards.  I stopped using a debit card for my regular store spending, gasoline purchases, etc. and only use a credit card after listening to a Google Talk by Frank Abegnale of the movie “Catch Me If You Can” fame.   In the talk Abegnale, an expert on consumer fraud, explains why a person can be more easily defrauded by using debit cards.  He recommends only using credit cards. Credit cards also offer extras such as points, frequent flier miles, or cash back that provide extra value.  Having had my debit card used for fraudulent purchases and having seen other family members go through this, I firmly believe in the credit card for purchases—as long as you don’t buy more because you are using credit.  My presumption is you’ll be prudent and pay it off every month.

I use a simple spreadsheet to track my income and expenses.  I also check my bank account and credit card account almost every day to ensure there is nothing unexpected going on.  Here’s a way to think about and categorize expenses.

Fixed Expenses—expenses such as rent, car insurance, mortgage, life insurance, health insurance, cell phone, etc., are fixed and non-discretionary.  These have to be paid.

Mostly Fixed—these are necessary expenses that vary to some degree, but you’ll pay for them every month such as food, utilities, fuel. 

Discretionary but hard to do without—Netflix, other streaming or cable TV services, newspaper subscriptions, fitness club memberships, and for many, tithing, charitable contributions, etc.

Other expenses–There are many items you may pay for over the course of the year that are mostly predictable, however, vary in amount and timing (many are annual) and they will throw you off your budget if you are not ready for them.  Homeowners usually have more of these expenses.  To give you example, here is an incomplete list of these “other” expenses I keep track of and budget for:

Co-pays

Regular car maintenance such as oil changes and tires

Microsoft Office 365 Subscription

TurboTax Software (I do my taxes every year)

Termite bond

Homeowner’s Association fees

Professional Association dues

Birthday gifts

Christmas gifts

Other gifts (wedding, graduation)

Anti-virus software

Home repairs

Root Canals and crowns (growing old sucks)

Etc.

As you can see, it’s quite a list.  To get a grip on these expenses I’ve been tracking them for a few years and now can easily plan and budget for them (they can be anticipated easily as well).  To do this I simply add up the total for a year, divide by 12, and set aside that amount every month in my checking account.  When these “other” expenses arrive, I have the funds available to cover their cost.  No big whoop.  No surprises.  When Christmas arrives, I have money saved up for the inevitable gift buying.  This method is the best budgeting tool I’ve ever used because it allows you to smooth out the variation in monthly costs that these expenses inflict on your finances. 

But wait, there’s more.  What about the big things that pop up unexpectedly and irregularly?  You know these expenses will occur, and you know they’ll hurt.  If you are living on a tight budget trying to get ahead, these are the killers that set people back and force them to use debt to cover the cost.  You want to be able to withstand these hits.  Here’s a brief list of what’s hit my bank account in recent months:

$500 insurance deductible when struck by uninsured motorist

$600 for alternator on otherwise highly reliable 2012 Toyota Camry

$1200 for new water heater (homeowners have more expenses)

$925 Retreat of a previous root canal (It wasn’t fun, but very necessary)

$3000 for new microwave/oven range combo unit (see what I mean about homeownership)

Total = $6,225

And had the pandemic not hit, I probably would have spent $2500 on travel for two weddings.

Cars, houses, and life cost money.  To be ready for these types of expenses you need to have savings set aside.  Some people call this an emergency fund, but I think of it as savings you are going to need to deal with life.  Every month sweep savings into a money market account or some other savings vehicle and don’t touch it unless you need it.  Remember, when you have extra savings you have options.  The option not to use debt, the option to not borrow money from family members, the option to stay on your plan to get ahead. You’ll sleep better and feel better about yourself with a reserve fund ready for the inevitable setback.

Getting ahead requires a little thought and planning that’s relatively easy to do.  If you haven’t already done so, I encourage to make a budget and begin to save a planned surplus for your future.  You won’t regret it.

Onward,

Pat Brennan

Pat Brennan is the founder of bucksandparks.com.

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